Industry Committee on July 20th, 2010

[Christian Houle]

There isn't a yes or no answer. A process is currently underway. Firm agreements have been signed and others are about to be signed. There is no simple yes or no answer. In terms of supply, we will ensure that our clients receive quality products, just like the ones they are receiving today.

[Dan McTeague, Liberal, Pickering—Scarborough East, ON]

Monsieur Houle, I think you can appreciate--

[The Chair, Conservative, Michael Chong]

Thank you, Mr. McTeague. Thank you, Mr. Houle.

Mr. Braid.

[Peter Braid, Conservative, Kitchener—Waterloo, ON]

Thank you very much, Mr. Chair.

Thank you to our witnesses and to our interested stakeholders for being here this morning.

Monsieur Houle, I would perhaps start with you, sir. Shell initiated this strategic review just over a year ago. In the press release announcing that review, and I'll read from it, it says that you will consider all long-term future options, which include the sale of the refinery and some associated downstream businesses, a joint venture, conversion to a terminal, closure, or continued operation. And then in your testimony this morning, you indicated that converting to a terminal was not your first choice.

In terms of the range of options that were on the table and that you announced a year ago, could you please rank them in terms of your preference?

[Christian Houle]

Mr. Chair, I think it's a question that I will pass to Mr. Oblath to answer.

[Richard Oblath]

Clearly, our first choice was to sell. There was no doubt in our minds. The minute we looked at our options, we immediately mobilized a team to try to sell the refinery. That started with one of my general managers in July of 2009, and we actively pursued that at that time. That was by far and away the best option we saw available to us.

[Peter Braid, Conservative, Kitchener—Waterloo, ON]

And the ranking of the remaining options, if you could, please?

[Richard Oblath]

Certainly shutting down the whole facility and not having product come through Montreal was way at the bottom. We did not think that was a viable opportunity when we looked at it.

As far as the other options, clearly, as we studied it--and remember, these studies were ongoing--the terminal option became the next-best alternative to selling.

[Peter Braid, Conservative, Kitchener—Waterloo, ON]

Mr. Oblath, you indicated that closing the refinery was probably the last option that you wanted to consider. Why is that, and what would the impacts be of closing the refinery?

[Richard Oblath]

Clearly, if there's no refinery and no ability to move liquids into the region, there would almost immediately be shortages.

[Peter Braid, Conservative, Kitchener—Waterloo, ON]

Further, Mr. Oblath, the press release speaks to, again in terms of the options, the sale of the refinery and some associated downstream businesses. Would that have included the wholesale components of the business?

[Richard Oblath]

We were open to offers for people to buy the wholesale business, or even to buy our whole business in the area. We would have been open, and were still... I mean, that's one of the discussions with Delek. We were still open to that opportunity if someone wished to do that.

[Peter Braid, Conservative, Kitchener—Waterloo, ON]

I'm changing gears now slightly and trying to wrap my head around some of the sums involved in terms of the cash required for the deal. You've indicated that you've already made significant investments in the refinery in the last six years—$400 million--and despite that, another $600 million is required.

I have a twofold question. First of all, the $400 million of investment that you made in the last six years, what have those investments been made in? Secondly, what's the purpose of the remaining $600 million in investments?

[Richard Oblath]

Mr. Chair, again I'll pass this to Monsieur Houle.

[Christian Houle]

I would say that in the last four or five years the major investments have been into new gasoline hydrotreaters for the new legislation on sulphur in gasoline, and also a new distillate hydrotreater, which is about $300 million, to remove the sulphur in the diesel. Also, we invested into a continuous—that may be a technical term—reformer. It's a profitability project to improve the yields in the molecules and the value of the yield in the refinery.

For the $600 million remaining in front of us over the next five years, it's made up of about $250 million of turnaround, and those are moneys you have to do maintenance in your processing unit after two years, four years, five years. So each unit has a different cycle for maintenance. The most obvious one is the catalytic cracking unit in September and the alkylation unit. It's about $50 million that we have to spend right now. Then in the springtime we have a crude unit in the hydrogen plant that needs to have a huge shutdown, which is about $70 million. So you have about $250 million of these kinds of moneys.

The remaining is money for process safety issues like control rooms. We do have to move control rooms to other locations for safety purposes of the people, especially based on BP toxicity and that kind of event. We do have a water treatment plant that is at the end of its life. So some vessels... We have derogation calculations for safety margins that can last a few more months, but they are at the end of their lives. That's about another $60 million for those.

We have a boiler that can go on like that for a while. We have a boiler on the catalytic cracker unit, which is $40 million, that is at the end of its life.

Those are basic units that are essentially at the end of their lives.

[The Chair, Conservative, Michael Chong]

Thank you, Monsieur Houle.

Monsieur Bouchard.

[Robert Bouchard, Bloc, Chicoutimi—Le Fjord, QC]

Thank you, Mr. Chairman. Thank you all for being here today.

My first questions are for Mr. Rocheleau. You heard Mr. Oblath say earlier that Shell had not received an offer of $200 million for its refinery. You are part of the Fortier committee. One of the terms set by Shell for considering an offer was that the offer be between $150 million and $200 million. Is that correct?

[Jean-Claude Rocheleau]

As you know, the Fortier committee was forced to shut down on June 17. So, we were not a party to discussions between Delek US Holdings and Shell with respect to a higher bid. We did not receive those details because the committee ceased its activities. So, I never received that information. However, if the figures are correct, the amount in question was in the price range that Shell had indicated it was seeking for its refinery.

[Robert Bouchard, Bloc, Chicoutimi—Le Fjord, QC]

Shell wanted somewhere between $150 and $200 million. In other words, Shell was ready to look at an offer between $150 and $200 million. That is what you understood, as member of the Fortier committee.

[Jean-Claude Rocheleau]

Yes, that is what was in the Shell's data room that we had access to. The data room showed a price range, and, if the figures we saw are correct, it would mean that the offer was certainly in the upper part of the range Shell was asking.

[Robert Bouchard, Bloc, Chicoutimi—Le Fjord, QC]

You said that the Fortier committee was discontinued. What can you tell us about that? Did Shell put a stop to the committee, in your view? You sat on the committee. How do you see it?

[Jean-Claude Rocheleau]

We received a letter, written in English, from a lawyer for Shell. She demanded an immediate halt to the Fortier committee's work. We knew that, if the committee's work was not stopped, subsequent discussions between Shell and Delek US Holdings could be put in jeopardy.

So, since we did not wish to be seen as an obstacle to the work of trying to sell the refinery, we preferred to stop our work so that we could not be accused of having blocked discussions between Shell and a buyer.

[Robert Bouchard, Bloc, Chicoutimi—Le Fjord, QC]

I have some questions for Mr. Oblath.

I have an item from Radio-Canada here. It says:

Delek then revised its offer to $420 million: $200 million for the refinery and $220 million for the gas stations in Quebec and the Maritimes. Shell turned the offer down and stuck to its price of $500 million.

Was your initial asking price $500 million, or did that price go up, increase or change during the negotiations?

[Richard Oblath]

Again, the expression of interest from Delek... I do not know where those numbers came from that you quote in the press. The negotiations between Delek US and Shell were in total confidence. There obviously were leaks from those discussions, but I can tell you, I was in the room during those discussions, and those are not the numbers that were discussed between us.

It is true that the offer for the refinery and the wholesale businesses approached $200 million. That is a correct statement. As I said, though, that is not for the refinery alone. We twice asked Delek US, would they buy the refinery alone. The answer was no. We were willing to sell the refinery and the wholesale business, but not for the same value as the refinery alone.

[Robert Bouchard, Bloc, Chicoutimi—Le Fjord, QC]

You mentioned confidentiality agreements. Delek US Holdings signed a confidentiality agreement with Shell. It is a pity that you did not agree to release Delek US Holdings from that agreement.

Explain to us why you feel that that buyer is not trustworthy and why you did not release them from the confidentiality agreement?